TaxTMI 
TaxTMI 
2014 (3) TMI 731
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....ate contention of the appellant raised without prejudice to its primary contention, that the denial of deduction in any event ought to be restricted to the amounts spent by the appellant on acquisition of capital asset using other sources of income and not to the entire amount of foreign exchange loan? 4. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal erred in law in holding that the expenditure incurred by the appellant towards fees paid the ROC, printing and postage in respect of a bonus issue that did not result in an expansion of the capital base was not an allowable expenditure? 2. Among the questions framed, questions 1&2 could be taken up together; question No.3 is an alternate plea; and question No.4 relates to expenditure incurred by the assessee towards fees paid to the Registrar of Companies, printing and postage in respect of bonus issue, whether was allowable expenditure. 3. It is agreed by the Revenue that the question No.4 is covered against the Revenue in the light of the decision in the case of Commissioner of Income-tax v. General Insurance Corporation reported in [2006] 286 ITR 232 and Commissioner of Income-tax v.....
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....It was further contended that the assessee had availed Global Deposit Receipt (GDR) during May 1994, and raised a sum of Rs.151 crores and these proceeds were sufficient to meet the capital expenditure. It was further contended that pending utilisation of the loan for raw material imports for the export thrust programme, the amounts were deployed in the inter-corporate market and also utilized in reducing over draft balance. Consequently, the assessee had earned interest/reduced the interest payable thereby increasing profitability which has been suitably taxed. It was further contended that the assessee should have been allowed to capitalize the interest to the tune of Rs.25,90,791/-, and exchange fluctuation thereon being Rs.9.59 lakhs as revenue deduction. 8. The first Appellate Authority sustained the order of the Assessing Officer, by order dated 13.09.2000. It was pointed out that initially the assessee contended that provisions of Section 43A are not applicable to their case, since from the loan obtained with the permission of the Reserve Bank of India, no capital goods were imported and the assessee has repaid the loan not from exports proceeds and the amount borrowed was ....
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....ctuation was eligible for deduction to the extent to which it admittedly did not source the acquisition of any capital asset. By referring to the applications submitted by the assessee before the RBI under the Foreign Exchange Regulation Act, 1973, it is submitted that the purpose of the loan was for financing capital expenditure on modernization and expansion and enhancing export capability and for financing export operations. It is further submitted that the RBI by order dated 21.09.1994, accorded approval for raising foreign currency loan of US$ 5000000 for the purpose of financing capital expenditure on modernization and expansion and the period of loan was for two years from 1994 to 1996; principal repayable in four equal semi-annual installments, the first repayment to be made six months after the disbursement of the loan and the interest repayable in half early installments. It is submitted that the assessee raised a sum of Rs.151 crores by issue of GDR and the proceeds were used to meet its capital requirement and as such the foreign exchange loan equivalent to Rs.54 crores was invested in inter-corporate deposits which earned interest and the interest income has been offer....
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....9 ITR 109. By referring to these decisions, it is submitted that the amount paid due to fluctuation in the exchange rate is capital expenditure and not allowable as Revenue expenditure. 13. In reply, the learned counsel appearing for the assessee placed reliace on the decision of the Hon'ble Supreme Court in the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras, reported in [1966] 60 ITR 52, and submitted that amounts was not in the nature of capital expenditure and was laid out exclusively for the purpose of the assessee's business and therefore allowable as a deduction. That the act of borrowing money was incidental to the carrying on of business and the loan obtained was not an asset or an advantage of enduring nature and it was irrelevant to consider the object with which the loan was obtained. Further reliance was placed on the decision of the Division Bench of this Court in the case of Sivakami Mills Ltd., vs. Commissioner of Income Tax, Madras, reported in [1979] 120 ITR 211 (Madras), and submitted that the very nature of expenditure would justify the claim of the expenditure as Revenue expenditure. By referring to the letter of approval given by RB....
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....tanding foreign currency loan utilized in respect of acquisition of plant and machinery based on the exchange rate applicable on the date of balance sheet is Rs.537.58 lakhs (included in capital work in progress). As this relates to borrowed funds, the same has been considered in computing the provision for tax. By referring to note 12 of the printed balance sheet, the first Appellate Authority accepted the view of the Assessing Officer with regard to the applicability of Section 43A of the Act. The contention raised by the assessee that no capital goods were imported against the RBI approved loan and loan had been paid not from export proceeds was rejected, as being contrary to note 12 of the balance sheet. The Tribunal pointed out that under Schedule 14 of the balance sheet, the assessee has spelt out its accounting policy regarding foreign exchange difference on account of foreign currency transaction, which states that exchange difference arising from foreign currency transaction are dealt with in profit and loss account or capitalized where they relate to fixed asset. Plant and machinery acquired through foreign currency loans are capitalized at the rate prevalent at the time ....
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....ure of the expenditure, the nature of the right acquired, and their relationship, inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. In the case of Commissioner of Income-tax v. Ashok Leyland Ltd. reported in [1969] 72 ITR 137 (Mad), which was affirmed by the Hon'ble Supreme Court in [1972] 86 ITR 549 (SC), it was pointed out that the clear-cut dichotomy cannot be laid down in the absence of a statutory definition of "capital" and "revenue expenditure". It was held that the word "capital" connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something tangible or intangible property, corporeal or incorporeal rights, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise and this distinction, though candid is susceptible to modification under peculiar and distinct circumstances. Therefore, it was held that the facts of each case, the attendant circumstances revolving round the expenditure, the aim, o....
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....and the liability existed before the change in the exchange rate takes place. Adjustments in the cost are thus made depending on the fluctuation in the currency rate. Thus the cost of the equipment assumes significance in the matter of working out the depreciation allowance. Referring to the amendment to Section 43A by the Finance Act of 2002, the Supreme Court pointed out that Under the unamended section 43A, adjustment to the actual cost took place on the happening of change in the rate of exchange and the Section did not require as a condition that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation, whereas, under the amended section 43A, the adjustment in the actual cost is made on actual payment. Thus the Section applies where as a result of change in the exchange rate there is a reduction or increase in the liability, that the adjustment of increase or decrease in the liability relating to acquisition of asset on account of the exchange rate fluctuation is reflected as part of the actual cost of the asset acquired in foreign currency and the depreciation is to be allowed accordingly. 19. Learned Standing Counsel app....
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....ment suffering exchange fluctuation as revenue expenditure. 21. It is seen from the reading of the balance sheet that the increase in the liability on account of the outstanding foreign currency loan utilized in respect of acquisition of plant and machinery to the tune of Rs.537.58 lakhs was included in the capital work in progress. The assessee admits that the expenditure on capital work in progress was to the tune of Rs.5227.35 lakhs as against Rs.1282 lakhs as on 31st March, 1995. Though the purpose of loan is one for capital expenditure on modernization and expansion, the contention of the assessee is that the balance amount had, in fact, being kept in deposits, which is also for business purpose only. As pointed out by the Tribunal, the assessee, does not, deny the fact that there was no one to one correlation on the amount invested in inter corporate deposits and the loan amount taken. In the face of such a finding and in the face of the object of securing the loan for financing the capital expenditure of modernization and expansion, we do not find any merit in the contention of the assessee that the deposits kept were also for business purposes and hence, the difference in ....
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....and following the said decision, the Division Bench of this Court in the case of CIT vs. ELGI Rubber Products Ltd, (supra) held that the additional amount paid by the assessee therein to ICICI due to the fluctuation in the exchange rate constituted capital expenditure. 24. We hold that given the object of the loan taken, the above said decisions will have relevance in deciding the issue against the assessee. 25. Learned counsel appearing for the assessee placed heavy reliance on the decision of the Supreme Court in the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras reported in [1966] 60 ITR 52, as well as the case of Sivakami Mills Ltd., vs. Commissioner of Income Tax, Madras, reported in [1979] 120 ITR 211 (Madras). 26. As far as the the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras reported in [1966] 60 ITR 52, is concerned, the said decision related to the expenditure incurred in raising a loan from Industrial Finance Corporation of India. The assessee contended that the loan was applied wholly and exclusively for the purpose of business, hence, was an admissible deduction under Section 10(2)(xv) of the 1922 Act. The Supreme Court poin....
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....t which it had been incurred would justify the claim of the expenditure as revenue expenditure. This Court pointed out that the interest paid on loans borrowed for purchase of machinery and plant could be capitalised in cases, (a) where the business of manufacture was newly set up or (b) where the assessee had carried out a new expansion. This Court pointed out that the principle of capitalisation was not to be confined to a newly started business and it applied to a new business or a new unit of an existing business and the appropriate tests for a decision have to be looked at in the background of the facts of the case. On facts, this Court held that the expenditure was incurred in the course of carrying on the business. The commission was closely related to the business and hence it could be viewed as an integral part of the conduct of the business and would be a revenue expenditure. Thus the nature of the expenditure and the time at which it had been incurred would justify the claim of the expenditure as revenue expenditure. 28. This Court further observed that the expenditure incurred for the purchase of machinery was undoubtedly capital expenditure, for it brought in an asset....
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.... pointed out that by post-mortem analysis of the sources and application of funds, the assessee could not prove a different version of the story and after a lapse of three years, the assessee could not change what had happened earlier by a mere statement of fund flow. This was reiterated by the Tribunal too in its order. 33. We agree with the Tribunal's view finding that the assessee had failed to support its contention through any concrete evidence. The assessee in its accounts admitted the foreign exchange loan as capital for acquisition of machineries and assets and accordingly the scheme was capitalised. The Tribunal pointed out that there was no evidence that the funds were utilized for the purpose other than what was stated in the annual accounts. It further pointed out that in the cash flow statement and the balance sheet, the assessee could not point out that the assessee had obtained the foreign loan with the approval of the RBI for financing export operations meant for inter-corporate investments. 34. With the distinct features thus seen, this Court holds that the decisions of the Supreme Court in the case of India Cements Ltd., vs. Commissioner of Income Tax, Madra....
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....After noticing the accounting policy of the assessee as spelt out in the printed balance sheet in Schedule 14 which stated that exchange difference arising from foreign currency transactions are dealt with in profit and loss account or capitalized, where they relate to fixed assets and plant and machinery acquired through foreign currency loans are capitalized at rate prevalent at the time of purchase, the Assessing Officer took note of the Director's report which pointed out that substantial modernization and expansion was made during the earlier year and the current year, construction work in respect of the export oriented unit was in progress and the trial production was expected to commence during June 1997 and full scale stabilization was expected by the end of 1996-97. Further, the assessee had commissioned its new tube plant at Shirwal, Maharashtra. As already pointed out in the notes to the accounts in paragraph 12 that capital work-in-progress includes exchange fluctuation of Rs.736.01 lakhs and interest Rs.35.50 lakhs and the increase in rupee liability on account of outstanding foreign currency loan utilized in respect of acquisition of plant and machinery based on t....